By Thomas Streater
It's the world according to Goldman Sachs. No, it's not a new
best seller or trashy article about the esteemed investment bank,
but rather its keenly awaited annual list of top ten market themes
for the new year. This year's edition gives Asian investors plenty
to ruminate on.
Goldman's outlook, which joins a growing list of brokers
unveiling their prognostications for 2015, highlights how investors
will need to be nimble to successfully navigate the ongoing bumps
in China's attempts to restructure its economy, the fall-out from
the end of easy money polices in the U.S., as well as the cascading
global impacts of a rampaging greenback and weaker oil prices.
For fund managers deploying capital into Asia, there is no
bigger story than China. The world's second largest economy has
been front of mind for investors this year as Beijing has pulled in
the reins on the era of double digit growth fuelled by cheap and
easily accessible credit. China's growth slowed to a five year low
of 7.3% in the third quarter as stricter credit standards and
policy initiatives poured cold water on the once red-hot property
market.
Goldman sees more of the same in 2015 as China's government
attempts to deal with excessively high debt levels among companies
and local governments, and tries to address a housing market
plagued by large inventory levels. Stating the obvious, the broker
warns that investors should "expect more volatility in macro
outcomes" in China compared to the steady upward trajectory before
the financial crisis. You don't say. It's easy to rev up growth
with a one-two punch of cheap credit and a blind neglect for
pollution, but not so easy to sustain turbocharged growth when the
punchbowl is taken away.
Goldman's outlook is a similar refrain to Credit Suisse, who
warned in their recently released 2015 outlook that the short-term
costs from Beijing's moves to address imbalances are "high", even
though they will improve long run sustainability of growth. No
punches are pulled with the warning that China real estate is "the
epicenter of the triple bubble of credit, investment, and housing."
Credit Suisse is expecting China's growth to dip to 6.8% next year,
with depressed margins and overcapacity expected to hurt investment
growth. While no stimulus or credit easing is expected, there are a
number of economists who think interest rates may be cut and the
reserve requirement ratio may be lowered, a move which would allow
banks to lend more money.
However, Goldman views China as one of the more inexpensive
emerging markets. The broker is right in its assessment that more
supportive policy and the willingness to embrace reforms and
address structural issues is required to drive a rerating of
Chinese stocks. According to J.P. Morgan, China stocks trade at 8.5
times estimated 2015 earnings, about half the multiple that India
stocks are fetching. While there are numerous risks, Goldman sees
the Hong Kong-Shanghai Stock Connect as a positive given it may
attract money in A-shares and help them outperform H-shares.
However, caution is urged on Chinese property bonds. While not the
most earth shattering call, it is a good reminder of the risks out
there.
The unwinding of the Federal Reserve's easy money policies will
also be a major issue, especially in Asia. Goldman has a
non-consensus call that U.S. rates will rise faster and higher than
the market expects once growth triggers the central bank to start
hiking. Investors who have fretted about the possible exit of
capital from Asia as U.S rates start moving up will find little
comfort in the broker's calculation that the neutral level of U.S.
rates is 4%. HSBC economist Ronald Man thinks higher interest rates
in the US will squeeze the pace of credit growth in Korea,
Indonesia and the Philippines. Credit growth of course is a key
driver of asset prices, so that raises some alarm bells.
The prospects for a stronger U.S. dollar are another concern for
investors in Asia. Here, Goldman is a card carrying member of the
US dollar bull club. The belief in the greenback's strength against
other major currencies may be touted as the broker's strongest
"asset market view looking through 2015", but it is a view broadly
aligned with many other forecasters. The dollar is expected to gain
against other currencies as rates rise, the U.S. economy recovers,
and the price of oil remains low. However, a strong dollar is not
necessarily all bad news for Asia. A weaker currency can help
policymakers fight very low rates of inflation, and Goldman reckons
South Korea - where inflation climbed about 1% year-on-year in
September - would welcome a weaker won.
Oil has featured prominently in the headlines this year, and
it's likely to continue to be a major influence next year. The
sharp fall in crude prices will start to be more fully felt in
2015, providing a boost to those economies that are dependent on
imports to grease the wheels of economic growth. Goldman cites
India as a key beneficiary, which would be welcomed by new prime
minister Narendra Modi who is keen to forge India into a
manufacturing powerhouse.
But what does this all mean for stock investors? Well, when it
comes to actionable ideas, Goldman is upbeat on emerging market
equities, especially those exposed to an improvement in domestic
fundamentals, the ongoing recovery in US economy, and lower oil
prices. Taiwan, South Korean and India are highlighted as markets
that offer investors a combination of these positive elements.
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Email: thomas.streater@barrons.com
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